Lending to small and medium-sized businesses accelerated sharply at the start of 2026, despite growing economic uncertainty linked to the conflict in the Middle East, according to the latest UK Finance Business Finance Review.
Gross lending by the UK’s main high street lenders reached £5.3bn during the first quarter of the year, up 16% compared with the same period in 2025 and the highest quarterly total recorded since the end of the pandemic lending schemes.
The increase was driven by strong demand from smaller businesses, with lending to the smallest firms rising by 51% year-on-year.
UK Finance says the growth reflected improving business confidence at the start of the year, supported by expectations of lower borrowing costs, easing inflation and stronger consumer demand.
REAL ESTATE
Real estate was one of the strongest performing sectors, with lending increasing by more than a third compared with the previous year. The sector accounted for almost 60% of the overall increase in SME lending during the quarter.
Agriculture, wholesale and retail, and recreation and personal services also recorded substantial increases in borrowing activity.
Finance approvals continued to strengthen, suggesting demand for funding remained robust heading into the second quarter. The value of new loan approvals increased by 36% year-on-year, while approval volumes rose by 42%.
However, UK Finance warns there are emerging signs that geopolitical tensions could begin to influence business behaviour.
LOAN APPLICATIONS
Loan applications eased during March following a strong start to the year, while overdraft applications increased noticeably, particularly among smaller businesses. The trade body noted similar patterns were seen during the early stages of the Ukraine conflict in 2022 as firms sought additional working capital to manage rising costs and uncertainty.
Overdraft utilisation also increased during the quarter, reaching its highest level since March 2024. Manufacturing, construction, real estate and recreation businesses all reported higher usage levels, suggesting some firms are already drawing more heavily on existing facilities.
Despite the rise in borrowing activity, UK Finance says there were currently few signs of widespread financial stress across the SME sector.
Loan repayments remained stable, deposits declined only modestly and around four in five businesses with outstanding debt remained confident in their ability to meet repayment obligations.
Looking ahead, UK Finance says continued disruption to global energy markets and rising inflationary pressures could weigh on business confidence and borrowing demand during the remainder of 2026, although lenders remain well positioned to support businesses pursuing growth opportunities or navigating a more challenging trading environment.
ENCOURAGING FIGURES
Gary Thompson (main picture, inset), sales director at Asset Advantage, says: “Given everything that has been going on in the world over the past few months, we should be hugely encouraged by today’s figures.
“SMEs continue to demonstrate real resilience and ambition to invest in growth despite a challenging operating environment. It certainly mirrors what we are seeing on the ground in terms of business volumes and what we are hearing from our broker partners.”
ECONOMIC UNCERTAINTY
He adds: “As businesses continue to navigate economic uncertainty and the impact of geopolitical tensions on supply chains, trade, costs and confidence, access to finance will remain absolutely critical. While uncertainty doesn’t eliminate opportunity, it does force us to be disciplined and to think more strategically – particularly when it comes to funding needs.
“Lenders have to be willing to provide that opportunity, looking beyond ever-tightening risk appetites and lending criteria to really understand the story behind the application and ensure good businesses get the fair hearing they deserve.
“This remains a key strength of more specialist funders, who are able to offer a more flexible and pragmatic approach to work with brokers in support of their SME clients.”
